(Repeat for additional subscribers)
June 18 (The following statement was released by the rating agency)
The Bank Recovery and Resolution Directive published
last week in the EU Official Journal is an important building block for
effective resolution and underpins our view that extraordinary support for
senior creditors is becoming less likely, Fitch Ratings says. Some aspects of
resolution are still evolving, but there was sufficient uncertainty about
sovereign support to prompt our Outlook revisions in March: around 60 EU bank
ratings are now on Negative Outlook because of diminishing support.
The Directive gives authorities a comprehensive suite of resolution tools. We
believe the bail-in tool to be the most effective because there are fewer
practical hurdles. The legislation also helps address some of these challenges
for effective bank resolution. For example, it empowers authorities to make
banking groups change their structure to improve resolvability. It also reduces
the political flexibility for the state to bail-out banks, although it is still
possible. We also believe the Single Resolution Mechanism will weaken national
scope to support a bank in the eurozone.
But the minimum requirement for own funds and eligible liabilities and how banks
will shift their debt structure to meet this are not yet clear. The recent surge
in issuance of junior debt helps provide senior creditors with a larger buffer
against bail-in. Banks are likely to continue to adjust this cushion as
regulation is clarified and in response to market pressures.
Group legal structures are also likely to change with the greater emphasis on
resolvability. The resolution strategy - for example, a single point of entry -
is likely to influence the group structure, where business is booked and where
debt is issued. Structural changes may be combined with other initiatives like
ring-fencing. The risk profile of legal entities within a group may alter as
these shifts take place.
Nevertheless, we believe sufficient progress has been made toward removing or
reducing sovereign support within one to two years - hence the Negative Outlook
for affected banks. We expect to remove or reduce sovereign support from these
bank ratings in late 2014 or in 1H15. This is likely to result in downgrades.
Fitch is discussing changes in support dynamics for banks at its annual Global
Banking Conference in Frankfurt, Madrid, Paris and London this week. For more
details, see here